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Polycab India Ltd
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Ladies and gentlemen, good day, and welcome to the Polycab Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gandharv Tongia. Thank you, and over to you, sir.
Thank you, operator, and a very good afternoon to everyone present on the call. I'm Gandharv Tongia, CFO at Polycab India Limited. Thank you for joining us. On this call, we shall discuss our operational and financial highlights of Q1 fiscal 2022. Please note, during this call, we will be referring to the presentation, financial result and financial statement, which are available on the stock exchanges as well as Investor Relations web page of our website. It can also be downloaded through the link or QR code on Slide 8 of our earnings presentation. From our management team, we have with us our Chairman and Managing Director, Mr. Inder Jaisinghani. Let me now hand it over to Inder Bhai for his comments.
Good afternoon, everyone. First quarter performance has been encouraging despite challenges caused by lockdown in many states. We were able to record much better business compared to last year. We remained vigilant in the managing cost and navigating the volatile demand environment. More importantly, we are progressing well on our strategic agenda and achieving new milestones, which will drive transmission over mid-to-long term. We continue to sell communities and fulfill our purpose of meaningful ways. I now request Gandharv to take you through our earnings presentation.
Thank you, Inder Bhai. As you all are aware, the business environment has been very dynamic in the previous quarter. Despite that, we have been able to achieve decent performance owing to resilient business model. On the good side, construction activities continued for better part of the quarter, albeit at a slower pace, all things to our calibrated approach taken by government in terms of lockdowns. Project and industrial activities started trending up as [ case load ] subsided from its peak. Our learnings from the past also helped us improve our supply chain and production, which remain largely unaffected. Consumer sentiment remain positive, and we believe there could be some pent-up demand in coming quarters. On the flip side, raw material volatility continued. The inflation in our input basket was in low teens during the quarter, and our blended price hike was in high single to just double digit. In mid-June, sharp correction in copper prices caused further complications and improving demand scenario as dealers refrain from stocking in anticipation of price cuts. Accordingly, inventory labor in distribution channel dipped significantly, with secondary sales tracking ahead of primary sales. Though we believe this is a temporary sentimental setback and primarily will eventually catch up with underlying demand. Nevertheless, July seems to be panning out better than previous months. Retail outlets across the market are largely open at the moment, and activity is picking up. We continue to believe that second half is likely to be better than the first half of the year, similar to last year. Of course, and assuming that third wave, if any, doesn't severally impede the economic progress. Moving on to presentation with Slide 4 for the quarter ended June 2021. Our consolidated revenue was up by 93% year-on-year. EBITDA increased by 14% year-on-year, with 153 bps improvement in margin. Cost saving initiatives were more than offset by unfavorable operating leverage and input cost volatility. This limited the EBITDA margin to 7.3%. Having said that, I would like to reiterate that the right way to analyze our operating profitability would be on an annualized basis as several dynamic factors can weigh on quarter-to-quarter margins. Our staff cost at INR 959 million or 5.1% of sales was higher than last year, but broadly at par with Q4. A&P spend at INR 78 million or 0.4% of sales were optimized considering the subdued business environment seen in Q1. Our finance cost at INR 122 million were lower by 25% year-on-year. Other income at INR 253 million was down by 25% year-on-year due to one-off interest income gain in the past quarter. A detailed breakup of our other income and finance costs have been provided on Slide 12 of our earnings presentation. Our profit before tax at INR 982 million was up by 151% year-on-year, while -- and PAT at INR 753 million was down by 36% year-on-year, again, on account of one-off gains in the base quarter, as explained on Slide 9. [ Normalized ] PAT is 10x of last year. PAT margin in Q1 stood at 4.0% against a normalized margin of 0.8% in the same quarter last year. Moving on to segments. On Slide 5, wires and cables revenue doubled over the last year despite the multiple challenges. In domestic business, cable outperformed wire in Q1, but that was partly on account of relatively favorable base. Distribution as well as institutional business grew over 100% year-on-year, where the institutional being marginally better, again, on software base. Though from an overall market perspective, we believe the institutional business still continues to see remain subdued due to relatively lower number of large-scale projects. As I mentioned earlier, in June, we saw sharp correction in copper prices. This impacted the trade sentiment, particularly for primary sales of retail wire just when markets had started to open up. Exports business grew 12% year-on-year. The share of overall revenue improved sequentially to 6% in first quarter versus 4.5% in previous quarter. The growth was driven by Asia, Australia, U.K. and Africa. Logistical challenges due to shortage of containers globally continues. Overall, segmental profitability for wires and cables was impacted by raw material inflation and adverse operating leverage. On Slide 6, FMEG revenue increased by 39% year-on-year. The business momentum was affected by closure of retail shops across many large cities. Distribution expansion continued with greater thirst on digital marketing campaigns. Innovation-driven product development and improving competitive positioning remains a key focus area. We have a healthy pipeline of new products across categories. Fan, which is our largest category in FMEG, grew in healthy double digits. However, lockdown, in April and May, which are key summer stocking period impacted for our second consecutive year. Within fans, portfolio mix continued to improve towards premium. Lights business grew with higher emphasis on augmenting portfolio across price pyramid. Switchgears saw strong growth however switches remained subdued. With learnings and success from strategic intervention in switchgears, we are now in process of integrating switchgears with light business, which will help us unlock synergies through operational advantage and distribution overlap. Solar and conduced pipes saw healthy traction. Overall segment profitability was largely impacted by adverse operating leverage. Raw material inflation has been counterbalanced by pricing action and cost [ conshipment ]. While many of you may be aware of this, but for the benefit of larger audience, I would like to update you all that last month we acquired Silvan Innovation Labs. It is a Bangalore-based technology company focused on providing cutting-edge automation offering for homes, offices, banks, retail outlets, hotels and other spaces. Silvan pioneer the concept of home automation in the Indian residential building market and has a proven track record with many prominent real estate developers. Acquisition of Silvan augments our R&D and innovation capabilities. It will enable us to address evolving consumer needs, Home and Silvan put together gives us strong foothold in IoT space and is in line with our ambition to become a forefront consumer-centric company. Moving to Slide 7. Other segment, which is largely our strategic EPC business, closed INR 575 million in revenue, up by 19% on a year-on-year basis, but decreased by 25% on a sequential basis due to impact of pandemic. Segment margin stood at about 11%. This copper segment, as disclosed in the financial largely reflect results, which is a part of our backward integration initiative. We continue to explore options to improve utilization rate at Ryker plant in order to optimize production cost structure at Ryker. Moving on to financials from Slide 9 onwards. Our net cash position stood at over INR 6.7 billion as of June end, which was 3.3x of same period last year. Working capital is a mixed bag. While receivables levels have been quite good, inventory levels were higher than normal as we were anticipating better demand scenario in June. Our numeric distribution metrics continued to trend positively. Even during lockdown, we were able to onboard many new dealers, especially on the B2C side. Project Shikhar, which is implemented in 5 markets in its first phase is helping us penetrate new retail outlets and improve shelf space. This was supported by aggressive digital marketing campaigns, which held an increasing brand awareness and connect with consumer. These campaigns across digital formats have cumulatively made over 24 crore impressions during the quarter. Project Leap continues to make good progress, and we hope to share some updates in the next quarter. I'm also delighted to highlight that our power cable test laboratory at Halol is accredited by National Accreditation Board for Testing and Calibration Laboratories, NABL. It is possibly the only private regulatory in India, having a wider scope of more than 4,000 plus tests covering a multitude of national and international standard. It is also the first laboratory capable of testing a single cable length from 50 meters to maximum to 4 kilometers. The test that have been issued by this lab will be accepted worldwide as per the agreement with NABL.Lastly, given the kind of building blocks that we are putting in place and our strong brand equity, we are very optimistic of a stronger performance on top line as well as bottom line in the coming quarters, particularly the second half of the year. With a clear strategic focus, we remain excited about our group's future growth prospects. With that, I conclude my opening remarks, and we will be pleased to answer your questions now. Over to you, operator.
[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.
My first question is with respect to the price hike that -- on a blended basis that you would have taken over the past 6 months in the cables and wires business?
Thanks, Ravi. Ravi, You know our business model. In the case of cable and wire business, generally, we revise our price list on a monthly basis. And there are 2 variables which are considered while deciding the price list. One is the increase in average copper LME private prices in the previous month. And second is change in the foreign exchange rate. Both were considered even in the current quarter. On a blended basis, the raw material cost would have increased by -- in early teens, whereas the price hike, which we have taken is just touching the double digit. So there is a bit of a negative delta there, which is also getting reflected in the contribution margin in the current quarter period.
Got it. Would we wait for commodity prices to cool off over the next 6 months? Or is it likely that you will go ahead and take the differential price hike, which is yet to be taken?
Yes. So the model, which I just elaborated is essential to our business. So we will continue to follow the same model, but, Ravi, you and me discussed this several times. In our business, what happens is on a quarterly basis. There are at times some dynamic factors, which can be on quarter-to-quarter margins. So that's the only thing. But if I were to take an annualized view, I don't certainly expect any material change in the contribution margin. And if you recollect, even last year first half, the contribution margin and EBITDA margin were slightly softer. But in the second half of the year and overall for the entire year, it was competitively a better number. So we'll have to, at times, take an annualized view. But directionally, I believe that, in quarters to come, particularly in the H2, the numbers are going to be relatively better than what we are seeing today.
Got it, sir. And with respect to the FMEG business, so basically there has been an EBIT level loss, which has been there. Is it because of the fact of lack of operating leverage because of lower than par turnover? And/or is it because of a combination of also delays in taking price increases across products scope?
You're absolutely right. It's primarily because of negative or add operating leverage. One of the reason is the employee cost. Ravi, you would be able to recollect that last year, we didn't offer any increment to our employees, whereas in the current year, we have given that. And partially, it is more like a 2-year increment rather than a single-year increment. So that is where the fixed cost for the corporate labor as well as our employees has gone up. The second one is the A&P spend, although it was calibrated, it's slightly higher than the base quarter and which is also getting reflected. Because A&P is primarily attributable to our B2C business, not to B2B business, and that is where these numbers are located to the segment. So these are the 2 main reasons, operating leverages because of fixed cost and as well as A&P. On the contribution, there is no significant or material difference.
Okay. Got it, sir. And my final question is with respect to the CapEx for the next 2 years, that is FY '22 and '23, what kind of CapEx we are likely to see? Will it be the INR 300 crore range per annum?
Absolutely. So in the current year, we are anticipating almost INR 300 crore of outflow. In the current quarter, we would have incurred close to INR 80 crores or thereabout. And next year, I think, it is slightly early to give any guidance. We'll probably wait for a couple of quarters towards the end of the year. We'll come back to you for the next fiscal, but this fiscal, I think should be around INR 300 crores broadly.
[Operator Instructions] We take the next question from the line of Naval from Emkay Global.
Yes. Am I audible?
Yes, sir.
Great. I have a couple of questions. First, if I compare your FMEG revenues with the market leader who also reported numbers yesterday, on a higher base, they are like flattish on 2-year CAGR, and we are like down around 11%. So on a low base also, this is a weak kind of number. So -- Can you elaborate was this because of regional specific things where you are heavy on West and West was more impacted with Maharashtra for lockdowns, or there was something else over here? So that is my first question.
Thanks, Naval. So, Naval, we are in this business since last year, competitively, we are a smaller player. The industry size is almost INR 600-odd crores piece and we did over INR 1,000 crores of , which is around 1.5% of market share we have across several product categories. Within that, the largest spend and sales got impacted because of localized lockdown in this particular current quarter. So that's there. And second, since our base is growing year after year, you would have seen the revenue CAGR is hovering between 35% to 40% on a 5-year period, that is also impacting the overall number. But on the growth of a B2C business, including FMEG retail buyers, we remain positive. The projects like Lead are also going to help us in augmenting the top line. We are in the process of augmenting the distribution, more particularly on the smaller towns. And in the quarters to come, I'm sure these initiatives, for example Leap or Shikhar, would help us in improving the overall top line. That was on the distribution side. On the product side, the brands like Home or the Silvan acquisition, which we have done recently, would also help us in augmenting the product portfolio, and we would be able to get into the premium product categories because IoT is going to be a premium offering. So overall, it looks like that we are here to experience the best of consumer business, both at retail wire as well as FMEG, and we remain positive on both these businesses.
Okay. And second question on other operating expenses, although you have given the schedule, so any specific reason sales are down 38% sequentially, while other operating expenditure down only 18.5%? So if you want to put -- give your insights whether this is one-off and operating leverage will bounce back strongly once the revenue recovers? Or there was something else to it?
You're right, Naval. Primary rate is operating leverage only because, as I mentioned to Ravi also in the previous question, the increase in fixed cost in the form of employee remuneration as well as payments to our contractors was affected from the current quarter, whereas the top line was not necessarily good from that perspective, and that is where it has impacted negatively on the operating leverage. Other than that, I don't think there is any specific line item, which requires a specific mention. Other expenses are broadly in line with what we had anticipated.
Understood. And lastly, can you give your insights on region-specific momentum in sales or demand recovery what you have seen in 1Q, East, West, North, South? And how they are trending in the current quarter?
So as far as current quarter is concerned, it's too early to comment, early 20, 21 days. But sequentially, it looks like that the current month is better than the previous month. On the -- And the other thing which I should clearly call out is that not necessarily reflective of the overall monthly performance because not necessarily 20 days would be reflective of our entire month's performance. On the regions, I think South got impacted, other than south, all other regions have done well. And South, I think we can attribute to the localized lockdown, which were there in the certain states. But other than South, I think almost all the regions have recorded significant growth across all the product categories.
The next question is from the line of Dhaval Shah from Girik Capital.
Sir, can you give us your outlook on the wire and cables business separately, what do you think about each segment. And also, you mentioned the institutional demand is lower -- So just more clarification on that. And it's more of the demand levers for the cables business, given the spending by the government is going on. There are a lot of spending happening on the solar park as well. So I assume there will be some new demand coming from that segment as well and we are leaders. So what sort of demand visibility do we have for this year and the next year along with exports? And then I'll come to the second question.
Sure, sure. That's quite comprehensive. Thanks for asking. Let me talk about the macro drivers, cable and wire utilized consumed in almost all the sectors. If you think of any infrastructure, any new expansion, greenfield, brownfield, any new offer, everywhere, you will need cable and wire. And we are the only company in the country which can provide all types of cables and wires. And our distributors are well placed to attend almost all the requirements, which our consumer would have. The other thing is, generally speaking, we have ability to provide the required materials almost there just in time or within 2 and that is a significant differentiator between us and our peers in the industry. You are aware about the initiative that the government is taking in terms of reforms. I would not like to spend time on that in this call, but I'm sure you're well aware about that. That will continue to help us in improve the GDP, the overall consumption of cable and wire and has the sector as well as a company like ours, which is a market leader by far. On the supply side and the FMEG side, what we are doing as part of Project Shikhar and project Leap, we are focusing on increasing our reach number of dealers and distributors, capturing to the requirements in the geographies where we don't necessarily are present or currently under index, for example, smaller towns. And both the government initiatives and our initiatives in penetrating the market would help us in improving the rate. You would have already seen our March presentation, where we have talked about that cable and wire, we expect to grow on a 5-year basis at 1.5% of the industry growth. And it could differ from a year to 2, but overall a 5-year horizon, we are hopeful that we will be able to do that, and that is why we are working with BCG under the project be to do that. So that was on the overall cable and wire.
Correct. Sir. So now like if you look at FY '20, we were at like around INR 7,500 crores top line, and '21 was INR 7,600 crores. So now here we already have like a 30%, 35% of inflation built into this when we talk about the future numbers. So what sort of guidance would you give us in terms of, say, by next 3-year period, where do we see this business reaching, building in the inflation?
So this is what we had covered as part of Project Leap and I presented to the investors after the March results. On a 5-year basis, we expect that we will be able to touch almost INR 20,000 crores of top line, where the core of our business will grow at 1.5x of the industry growth. We have factored in the inflation or movement in the commodity prices when we have completed this number of INR 20,000 crores. But as I mentioned in the March call as well, allow us to come back to you with next level of detailing in the second quarter, where I would be able to give you additional color on these numbers.
Okay. So on the cable side, you don't see any sort of problem in terms of your demand, right? Like coming from the new factories being built or all your demand drivers seems to be in place?
We are confident on the growth. India is a multi decadal story. So it's not only at the company level. Even at the industry level, we are considering the growth.
Got it. Got it Okay. Okay, fine. Now my second question with the FMEG side. So we did around INR 192 crore top line this quarter. And compared with like in second quarter FY '20 also, we were around this level only. But there, we did not go into loss. So is that a large part of the price hike is yet to be pass on, and also, we have a larger cost structure compared to the 2 years back, and that's why we have a loss in the FMEG?
Yes. As I mentioned to the earlier participant, it's primarily because of increase in fixed cost, and that is also the employee cost or the contractor cost. Last year, we didn't give any increment to our employees, which was given this year. And this was slightly more than which otherwise you would expect on an annualized basis. So that is 1 reason. The second is, the A&P spend has slightly increased and A&P predominately is for our B2C business. Of course, B2B business gets a bit of a rub-off effect of A&P, but primarily it is for B2C business. So these are 2 main reasons because of which the margins -- EBIT margins have gone into a negative trajectory. But I am still confident of the guidance which we provided in the last call that in 2 years period, we should be able to get to a high-single-digit EBIT margins for FMEG business.
The next question is from the line of Rahul Agarwal from InCred Capital.
Congratulations for a decent set of results. I had 2 questions. Firstly, wanted to understand contribution margins a bit better for Polycab. So to start with, is there any link between copper prices and gross margins? Because we, as analysts, try to link that and quarter-on-quarter, obviously, as you said, debate to understand on an annual basis. But overall, is it fair to say that a rising commodity scenario where copper is going up, gross margins fall and it's [ vice versa ] it's true? Is that correct?
Not really. As I mentioned to Ravi, as part of his first question, we have broadly 2 or 3 types of businesses we keep in brand talking from a channel perspective. One is distribution, we have been factored in previous months foreign exchange rate, [indiscernible] rate as well as copper LME and revise the list price. The second was export business, where the dynamics could be different, where you quote the price up and then according to pricing. And third is institutional where generally you take back to back positions. So these are 3 things which we follow consistently. At times, you take calibrated approach in the pricing, and this is what was done in the current quarter as well. The increase in raw material costs at the basket level was almost in early teens, whereas the price hike, which were taken in the current quarter, was just touching the double digit, and that is where you can see a delta or a negative delta on contribution margin. But generally speaking, on an annualized basis, we have not seen significant difference in the margin, and that is what is important. And the other thing is, at times, there is a mix change. If you are attending customers, which are far away from your plant, you end up incurring some additional fee costs. And if there's an increase in the export business, which is there in few of these quarters, the other spread incidents also plays in. So there are a few dynamics factors. But all we are, Rahul, we are aware about this. We are probably the largest consumer of copper in India, and we have pricing ability to price the copper at the most appropriate time, and that is where we don't generally see any significant risk because of the risk management frame book, which we have in place.
Correct. So fair to say that the normalized level of 25% obviously comes back as and when the entire pricing thing is passed through, and overall, we see a normal sale environment in India? Broadly, we should be back in terms of cable and wire gross margin should be back to normal levels? Is fair to say that?
Absolutely. Absolutely.
Okay. And second question was on inventory at INR 2,600 crores looks very high than normal for Polycab given the history and [ debtor ] at INR 900 crores obviously looks very low versus history versus normal levels. Could you help us understand this change?
Yes. So both of these numbers are not sustainable. Let me deal with receivables, and then I'll come back to inventory. After softening of copper prices in mid of June, slowly, sales started getting impacted adversely. And that is where we continue to collect on the outstandings of the sales that are made in the earlier months, but there was a dip in the overall sales in the month of June. And that is where the number of days of receivables or the absolute amount of receivable slightly looking lower. I don't think it's a sustainable number. Of course, with the help for channel financing penetration, we would be able to bring it down, but not on the basis of what we just experienced in the quarter gone by. On inventory, I mean 2, 3 things. One is still softening of copper prices adversely impacted our sales. It has indirectly resulted in an increase in our finance goods. And second is we were expecting and we are still expecting that in the quarters to come, we will have uptick in demand. And this is what, if you recollect the experience even in last fiscal, where the Q2 was better than Q1 and H2 was better than H1. So that is where there is slight updation in our inventory levels. As I mentioned in earlier quarters as well, inventory continues to be a focus area for us. We learned that during the IPO period as well that working capital is an area where we can do better, and I completely believe that we can do that better. In the quarters to come, we should be able to normalize it and have a better handle on it.
So there is no case of -- so obviously, there is some buildup because of temporary issues, which would obviously normalize over the next 9 months. And broadly, there is no case of inventory write-off, right? It's never happened in the history, right?
Never ever.
The next question is from the line of Devansh from SIMPL.
Sir, just wanted to understand on Q2 opportunities. One is EV cable and the second is the telecom cables, which can be for 5G next year. So in both, if you can just elaborate on the technological preparedness and the manufacturing preparedness as of now. And how are we seeing this opportunity? And what is the kind of interest that we have in participating in these opportunities?
So I'm sure you would have heard about the telecom division, which we have. We already have optical fiber manufacturing facility, and we have executed several projects, 1 in Gujarat and other one in Bihar of optical fiber. We are slowly and gradually expanding on our telecom footprint. These are early days to give you any specific guidance, but we remain positive on the overall growth potential of this particular vertical. And as I mentioned as a response to 1 of the questions, I think by the second quarter, we should be able to come back to you with nitty gritties a few of these items where we can give information publicly.
The next question is from the line of Atul Tiwari from Citigroup.
Again, 1 question on margins. I'm just trying to understand the sort of volatility that we have seen in this quarter. So from the time when this commodity value started, okay, how much your RM costs have gone up in percentage terms? And how much price hikes you have taken? And how much more price you need to take to kind of fully pass on everything? So that is one. And if you could just kind of walk us through that why did company not take enough price hikes to kind of maintain, say, 11% or 12% kind of margin? So why was there a bit of a mismatch? I mean we understand that, on a full year basis, the mismatch will be kind of made up. But why it could not happen during the quarter? What was the operational issue or static reason behind this?
Sure. Probably aloud feel like I'm repeating what I mentioned to another participant. But in the current quarter, at the RM basket level, the cost price increase, both of copper and aluminum raw material together was in low teens, whereas the price hike, which we have been able to take was almost touching the double digit. And that is where there is a negative contribution delta, which you are seeing in the P&L. Now the specific in the current quarter, what happens is, when you're working in a dynamic period where you want to manage both profitability as well as top line growth, at times, you take decisions of balancing the 2 with an assumption that higher sales will help you in getting better margins at the EBITDA level. What do I mean by that is if I am able to increase the top line, I would be able to utilize my plant more effectively. That would mean that my fixed cost absorption will be better, and that is where the EBITDA margins would be slightly better. So it's a play between contribution and EBITDA, and at times we do that. And this quarter, was also one of those quarters where the pandemic impacted several of the geographies. And we have all types of cables. We have retail wires as well as we have cables, which are used by industrial house sales, B2B products and all that. So all of those leases impacted the margins slightly in the current quarter. But as you would have seen even the last year, the H1 margin was slightly lower at EBITDA level. But on an annualized basis, as well as if you consider the H2 margins were better. we are still confident of going back to our normal margins as we progress in the current quarter.
Okay. Great. And just one last one. What would be the number of dealers and distributors and the retail that point that the company is reaching now? And what are some of the medium-term targets on that? And how much of that channel is now covered with channel finance? That is my last one.
So we are around 4,000-odd dealers and distributors at the country level and around 165,000, 170,000 retailers -- In terms of channel financing, in cable and buyer, we are hovering around the same percentage of 65%, 70%. However, in the case of FMEG we have been able to make some progress there and now we are hovering between 25% to 30%. We are hopeful that in FMEG, we would be able to further penetrate tenant financing and improve this by the end of the year.
The next question is from the line of Charanjit Singh from DSP Mutual Fund.
Am I audible?
Yes, you are audible Charanjit, please go ahead.
So sir, just 1 thing. One, in terms of our overall business split, what is the proportion which is coming from the institutional segment? In terms of general price hikes when we talk about in the institutional segment, what pace it follows, is it coming with a big lag generally in the other normal channel, what we've seen is that pricing is being passed on at a very rapid pace in the cables and wire segment we see. So how the pricing mechanism was special for the institutional side?
Thanks, Anj. That's an important one. So generally, around 85% of our business is distribution and 15% is it -- sorry, 85% is distribution and 15% is institutional. Institutional, generally, you take the copper price as and when you get the approval on the sales from the institutional client, which means practically back to back and that is where they will lag. The lag which I was talking about on a monthly rate was for distribution business, where we increased the list price on a monthly risk after factoring in the MME as well as on exchange rate, which was in the previous month. But there is no such mechanism in the case of the institution, it's order-on-order basis. And generally, we take back to back position on the basis of orders confirmed by the client.
Okay. And sir, now you also comfort this initiative with BCG on GTM and various other initiatives. So if you can just elaborate in terms of by when we see that our targeted goal, which we have to achieve with these initiatives, what's the target timeline? And if you can elaborate 1 on the GTM any initiatives which are also on the cost front, which we are trying to do through these [indiscernible]?
Sure. Thanks, Sanjeet. So there are 3 initiatives which we are running as of now. One is project Udaan, which we imbued on almost a year back, which is a cost optimization initiative. -- the entire cost base of the company is business per view of this particular program, and we have already identified savings potential translating to 80 bips to 100 bips and these initiatives are in the process of implementation, and we should expect getting trends to our P&L accruing over the period of 1 or 2 years. That was the first on Project Udaan, which is cost optimization. The second 1 is, which is a multiyear transformational program. The end objective is to get to INR 20,000 crores of top line by the end of fiscal '26, which is 5 years, and which is slightly more than double of what we achieved in fiscal '21. This covers almost all the facet of the organization, not only GP, how we are going to shape the B2B, B2C, what type of process we will have what type of digital footprint will have, what type of organization will have, what type of new product categories better we decide to enter into, we will get to.And in the March quarter, I had mentioned that by Q2 of this year, we'll come back to all of you and highlight the progress. And the third one is Project Shikhar, which is, again, our distribution program where we want to penetrate identified geographies and ensure that we are able to get a higher share of wallet or higher share of sales from the identified distribution target, which primarily would include channel expansion, having engagement with the influencer and the experts program. And this program will cover almost 300 cities in next 2 years or so.
Okay. Sir, just lastly on the fan side, so our mix in terms of the base versus the value versus premium, what is it right now? And in terms of the insourcing, which is outsourcing, how it will change in the next 1 year?
So premium fares are now almost in high teens, and this proportion as we go along would go up. Most of the fans are getting manufactured in our Roorkee facility. We are also in the process of augmenting fan manufacturing facility and another facility is getting erected in Halol in Gujarat and expected to be operational later in the current year. There is very small amount of fans, which are manufactured with the help of third-party suppliers, but their contribution to the top line at this stage is significant. Most of it or almost all of it is getting manufactured in-house.
The next question is from the line of Ankur Sharma from HDFC Standard Life Insurance.
A few questions. First, on our Q1 numbers in the cable and wire segment. How much was the volume growth, and how much was the price growth in that 97% growth that we've shown on the top line?
Thanks for asking. Even our business is slightly difficult to compare that way because 1 kilometer of aluminum cable will cause significantly different if you compare at the same cable if it is manufactured with copper. And that is where volumetric data is not necessarily the best way to analyze our company's performance. If you were to analyze our performance, there are 2 or 3 ways. One is, of course, you can check peer performance and our performance. And second, as you can check what is the movement in LME prices and for exchange rate and compare that with our growth. Volumetric data will probably give you misleading information.
Okay. Okay. Sir, differently, I think you said wires haven't done as well as cables during the quarter. So what was the mix of wires and cables in this quarter?
There's no significant change in comparison to the previous quarter. We are broadly in the same range.
Okay. Okay.
If you're looking for numbers, it would be around 50%, 51% type.
Okay. And sir, I think on the margin outlook, you said that while Q1, obviously, margins were fairly weak, because of the lag in passing on the higher copper and iron prices, what do you believe would be a more sustainable number, say '22, '23? Do you go back to that kind of EBIT margin rate? Is that the number you have in mind?
So on a line basis, generally, we have been talking about 11% to 13% of EBITDA margin. And if you see fiscal '21, we were able to beat that guidance. But as I mentioned to others that we are working on Project Leap and give us time till second quarter, it's quite possible that we would be able to give you more general information on Project Leap. And then on actual basis on half year or yearly basis, we'll come back to you and update you on the actuals against that guidance.
Okay. Fair. And just 1 last one, if I may, and I think this was discussed earlier in the call as well in terms of a recovery in demand on the cable side. So if you could just talk about, are you seeing large projects on the manufacturing side, or on the infra side? Any pickup over there? So primarily on the B2B that is starting to happen, which kind of gives you confidence that over the next few quarters, you start seeing a fairly sizable pickup on the cable business? So can you talk about either the inquiry levels, or how is the current demand situation?
You're right. So overall in the current quarter, the institutional business has picked up. Having said that, the larger projects are probably still on a slow track. But the smaller project, we have some visibility, and that is where we can see a bit of uptick in demand, both at order level as well as at execution level on the institutional side of the business. Having said that, I don't think we have these to the record pre-COVID level and can be a little wait for some time before we finally confident whether we are reached to the pre-COVID levels or not.
The next question is from the line of Sanjaya Satapathy from Ampleon Capital.
You have mentioned about your margin way that we should not really look at quarter 1 and look at the full year. And then you have mentioned that your margin was affected because of the copper price volatility. Can you just tell us that whether with all those are behind us, that is copper price stable and your pricing actions are more or less done? And So that way, Q2 will not have any such exceptional situation which was there in Q1?
Yes. So let me just explain the business model so that we are able to appreciate what we are doing here. 85% of our business comes from distribution. And because of distribution business, the list present generally revised on monthly rest. And when we do the division, we factor in 2 things. One is change in LME prices in the previous month as well as change in exchange rate. So there's a 1-month lag, which is there. And attempts, in dynamic situation like these, you take calibrated approach while balancing the price hike as well as -- and profitability and as well as deep topline growth. This is what we have witnessed. But generally in our experience, generally speaking, pluses and minuses are offset within the fiscal. And if you see on an annualized basis, the margins are not significantly different from earlier periods. And that is what I was mentioning to the other participants that if you take an analyzed view, you will not see a significant change. But because of this 1-month lag and, at times, dynamic approach, balancing top line and bottom line, at times, you would see some aberration between 1 quarter or the other.
No, that I understood. I'm saying that are those kind of behind us? Just a small maintenance kind of a question from a near-term point of view that is what I was trying to kind of understand. The second thing that I wanted to understand is that -- so it is -- your peers are also reporting results and their numbers and your numbers are appearing as very different. And I understand that it could be because of some technical factor like your geographical mix or many other such things. So what we really want to understand here is that your competitive position and your strategy of growth and gaining market share, are you confident that you'll be able to kind of silence your critics or whatever you say, sometime very soon? And you're fairly confident that you are doing better than your peers in -- because you have a superior business strategy and of growth?
Thanks for highlighting that. So as I mentioned in my opening remarks, we remain absolutely confident and comfortable on our strategy and execution. We have any which we've highlighted our ambition under Project Leap, which is INR 20,000 crores top line in 5 years from now and growth in 1 particular product category of 1.5x of the industry and another product category of 2x. And I have no reason to doubt our ability to achieve those numbers.
The next question is from the line of [ Bobby Jayaram ] from [ Banking ] Investment.
Could you talk a bit about how you're going to penetrate the FMEG market categories like sand, given larger players like cables and crampons are already well established. So what's your strategy? Is it pricing led or product-led, if you could talk a bit about that?
Thank you. I'm sure you're aware, we're already in top 6 or 7 in fans. We poured into this business 5, 6 years back, and since second or third year, we are EBIT positive in fan business. We are working on several initiatives, 1 on the GTN. We want to ensure further penetration, both at distribution and retailer label. Second is on the availability of our products across different pricing pyramid. Third is in-house production, which gives us confidence on the quality as well as the value for money for our consumers. You will be pleased to know that our field returns in fans and are lower in the industry because of the quality -- statin quality parameters we have in place. And then another important thing is the recent initiatives, both on the IoT side through Silvan and Home and the e-commerce initiative where we want to get to the next generation of the consumer, we are extremely positive on the uptick in the demand in the fan business for our company.
What is the IoT fans or appliances? What differentiates that from the products in the market?
It's a complete basket of offering where app-based products are available, which can be operated with the help of app or with the help of web. And this is not only tested to fans, almost all the products, whether you think of water heater, you think of lighting or fans, almost everything can be operated this way is being marketed under the brand Home. The recent acquisition of Silvan will help us in getting to home automation. And that is where the entire home automation product portfolio will also help us in improving our FMEG product sales, which would include, among other, fans as well. And these are the products which are manufactured in-house made in India with strict quality supervision and that is where the field returns are best in the industry.
Yes. The question I have is whether this kind of automation is something that's demanded by consumers? Because even in advanced markets, I don't see these kind of products. When someone buys the fan, they essentially want a fan that is breezy, doesn't break down and cost is priced reasonably. They don't want a lot of fancy settings and IoT and all that. So is that customer driven? Or are you, by any chance, overengineering these products?
Yes, I understood from your comments. That's probably 1 school of thought. But if we go by the broad understand of the IoT market, it was almost INR 2,600 crores in 2020. It is expected to grow at 30% CAGR. And I won't be surprised if it reaches INR 10,000 crores by 2025. and it could very much continue if not what we are projecting even after 2025. And in this pandemic, all of us have experienced that IoT or web-based applications and rising connectivity is the only way to look at the product development and which will help us -- that will help.
The next question is from the line of Kedar [indiscernible] from Fortress Group.
Sir, my first question is, again, on the FMEG business. If I compare your Q1 FY '21 revenue, that was about INR 137 crores. And we have almost 20%, 30% higher revenue. So actually, operating leverage should have been much better as compared to Q1 last year. So why is it that a loss has more than doubled at the EBIT level in the FMEG business?
You're right. The absolute amounts are slightly misleading because of the base. But if you see the type of organization which we have in place for FMEG and the increments which we have given, that is where the operating cost has gone up in committed last year, and that is where you can see the EBIT margin -- our EBIT margin negative territory. The other thing, which I should say specifically call out is A&P spend, which has moved over the period. For example, we used to incur IPL spend, which got reflected in a few of the quarter's P&L. In this particular quarter also, we have incurred some A&P spend, which is getting reflected in the P&L of FMEG business. On the base quarter, the A&P spend was almost negligible.
Okay. Okay, sir. Sir, second question is on the EPC business. Sir, on the other segment, that is the EPC, so are you confident of maintaining this revenue run rate in EPC and the margins? Would it be stable at around 11%, 12%?
So EPC is not a core business for us. We do it as a natural extension of cable business. It is not focused. We are cognizant of the fact that we are not an EPC company, we are a B2C company. Whatever small business we do as natural extension of cable and wires, we are hopeful that we will be able to continue with high single-digit, low double-digit type margins.
The next question is from the line of Rajesh Kothari from AlfAccurate.
Sir, I have 2 questions. One is, is there any inventory mark-to-market losses in this quarter?
So there are no mark-to-market losses because we follow hedge accounting. In the case of hedge accounting, if there are heavy relationships which are established, then it is a content under OCI. And that is where there is no significant impact. But on a generalized basis, always there will be some ups and downs because the inventory is linked with the LME and in any of the month and quarter end, there will be movement in LME. But there's no significant one-offs in the overall mark-to-market or hedging accounting in the current quarter.
So since you are saying since it is already hedged, and therefore, it doesn't impact the margins, then why the higher raw material prices impact the margins? I'm sorry, I'm a little bit confused.
Yes. So then the actual cost of procurement vis-a-vis the price hike which you have taken, were calibrated and that is where there is a delta, which is getting reflected in the contribution margin. As I have mentioned to 1 of the participants and we call at times in a dynamic quarter like these where there is a significant impact of Grade 2, you optimize on top line with anticipation of better margins because you would be better EBITDA margins because we be able to leverage on the fixed cost, and that is where you take these calls. And the contribution margin, if you see has dipped by 200 basis points in the current quarter.
So basically, what kind of price hike is required to compensate for the higher raw material -- or might be that now that's completely gone because the raw material cost has now already started coming down, and therefore, you may not be able to do price hike. So what is gone is almost lost kind of margin. That's the right way to look at it?
And that is why I highlighted in the earlier responses as well that in our business it's best to best to see on an annualized basis because there would be some pluses and minuses. And overall, on a 12-month basis, we are generally able to maintain the contribution margins. If you see last year, for that matter, the first half EBITDA margins, if I'm not wrong, were about around 12% or thereabout, but in the second half, it was 14%. And that is how the overall margins are competitively maintained on a realized basis.
No, that I understood. What I'm trying to ask is a little bit different. What I'm saying is that the raw material cost has increased, but you are not able to take the similar kind of pricing due to whatever reason. So what was the difference? That's point #1. And point #2...
That's our Points, it is getting reflected in contraction and contribution margin.
Okay. Understood. And the FMEG business, there also, we have seen the similar numbers. But if I look at, for example, Havells, another company probably in the similar segment, there, the margin profile and everything is quite significantly different compared to overcoming. So what would be the primary reason for FMEG segment apart from the operating leverage because the revenue decline is not that much.
Yes, mainly operating leverage. As I mentioned to the previous participant as well, the increase in fixed cost per the nature of increase in employee cost as well as the subcontractor cost an increase in A&P spend is -- has impacted adversely the EBIT margins of FMEG business. And, Rajesh, as you would be able to recollect in the last quarter call also I had mentioned, and I'm continuing with the same position that in 2 years from now, which is fiscal '23, we are confident of getting into high single-digit EBIT margins.
Yes, of course. And last question from my side. In terms of the employee cost, which is roughly around INR 92 crores, render you mentioned that you have done some increase in employee or something, which I could not understand because your fourth quarter was INR 96 crores and in first quarter is INR 92 crores. So there is -- I cannot see any increase compared to 4Q. So is that -- does it include any one-off bonuses or any such elements?
So the first quarter last year was INR 81 crores of fees in the first quarter this year is at INR 96 crores, and that is where you can see that there's an increment, which is visible.
Okay. But on a Q-o-Q basis, there is no such increase. So I was actually wondering that since the revenue declined so much, there are no, basically, steps to reduce the other costs. Because if I look at, for example, revenue from INR 3,000 crores, declined to INR 1,800 crores, correct? But if I look at the operating leverage, actually, to that extent, there is no significant increase in your other cost. So I'm just trying to understand the picture here. So is it that we are now basically becoming like a normal cost base and from this cost base we'll work on?
Yes. So I think 2 things, Rajesh. One is, in our business, always the fourth quarter would be best from the sales contribution to the annualized revenue. In our experience, at times, fourth quarter has contributed anywhere between 28% to 32% of annualized revenue, whereas the first quarter, and I'm not talking about the year affected depending generally speaking the first quarter contributes only 20%, 22% of the top line. And that is where it's slightly unfair to compare Q4 top line with the Q1 top line. The second thing is, in the fourth quarter last year, there were some incentive provisions which were accounted for and the details are that in first quarter of June '20, we decided not to give any variability to our employees considering the pandemic. But considering the performance of the company on an annualized basis, management decided to continue with the variable payment and which was accounted for in the fourth quarter. So there are a couple of such one-offs, including [ in the year ] '19 adjustment like gratuity and leave encashment. And if you normalize that, you can see there is an increase in impact cost. For example, June of '20 was INR 281 crores and June of '21 is almost INR 95 crores, INR 96 crores. And a specific whether the -- we have these to the normalized cost -- Yes and no. Yes, because we are there. But on no because, as I mentioned to another participant, continue to make investment on our go-to-market strategy. We will continue to expand on distribution, penetrate the market where we are currently underindexed. And for that, we would need additional working heads, and we'll make that investment. We will not shy away from making those investments.
We will take that as the last question. I would now like to hand the conference back to Mr. Gandharv Tongia closing comments.
Thank you participants for taking out time and attending this call. In case if your questions are not attended, please feel free to write to us at investor.relations@polycab.com, and we will be pleased with your questions. Thank you. Thanks a lot for your time. Stay safe and take care.
Thank you very much. On behalf of Polycab India Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.